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Standard of Proof in Insider Trading Cases - To Be Caught, It Should Be More Probable Than Not.

Updated: Apr 16

by Peeyoosh Karla, Pritika Kumar, Vishesh Sharma and Moksh Roy

Insider trading by itself is a very serious charge, however, it still falls under the category of a civil wrong, and in the case of civil wrongs, the standard of proof is preponderance of probability. This means that the act of insider trading does not have to be proven beyond reasonable doubt, as is the standard in criminal cases. Rather, presenting evidence which leads to the conclusion that the probability of the person to have committed the act is higher than not is enough to prove insider trading has happened.

In this article we delve into the explanations given by the courts on the concept of preponderance of probability generally, and specifically when it comes to cases of insider trading.

Preponderance of probability in general civil cases

In the decision of Miller v. Minister of Pensions[1] the King’s Bench Lord Denning stated the following:

2. In cases falling under art 4(2) and art 4(4) (which are generally cases where the man was fit on his discharge, but incapacitated later by a disease) there is no compelling presumption in his favour, and the case must be decided according to the preponderance of probability. If at the end of the case the evidence turns the scale definitely one way or the other, the tribunal must decide accordingly, but if the evidence is so evenly balanced that the tribunal is unable to come to a determine conclusion one way or the other, then the man must be given the benefit of the doubt. This means that the case must be decided in favour of the man unless the evidence against him reaches the same degree of cogency as is required to discharge a burden in a civil case. That degree is well settled. It must carry a reasonable degree of probability, but not so high as is required in a criminal case. If the evidence is such that the tribunal can say: “We think it more probable than not,” the burden is discharged, but, if the probabilities are equal, it is not.

While deciding culpability, the court must satisfy the degree of proof required in a civil case. The burden of proof is discharged when the courts, after looking at foundational facts of a case, arrive at the conclusion that an act “is more probable than not”.

There is subjectivity and abundance in discretion provided to the courts in weighing evidence and thereon deciding whether preponderance lies in submissions of SEBI. The discretion is explained by the Supreme Court in State of UP v. Krishna Gopal 1988 4 SCC 302:

“26. The concepts of probability, and the degrees of it, cannot obviously be expressed in terms of units to be mathematically enumerated as to how many of such units constitute proof beyond reasonable doubt. There is an unmistakable subjective element in the evaluation of the degrees of probability and the quantum of proof. Forensic probability must, in the last analysis, rest on a robust common sense and, ultimately, on the trained intuitions of the Judge.”

In the case of Dr. NG Dastane v Mrs. S. Dastane[2] (“Dastane”), it was held by the Supreme Court:

“24. The normal rule which governs civil proceedings is that a fact can be said to be established if it is proved by a preponderance of probabilities. This is for the reason that under the Evidence Act, Section 3, a fact is said to be proved when the court either believes it to exist or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists. The belief regarding the existence of a fact may thus be founded on a balance of probabilities. A prudent man faced with conflicting probabilities concerning a fact- situation will act on the supposition that the fact exists, if on weighing the various probabilities he finds that the preponderance is in favour of the existence of the particular fact. As a prudent man, so the court applies this test for finding whether a fact in issue can be said to be proved. The first step in-this process is to fix the probabilities, the second to weigh them, though the two may often intermingle. The impossible is weeded out at the first stage, the improbable at the second. Within the wide range of probabilities the court has often a difficult choice to make but it is this choice which ultimately determines where the preponderance of probabilities lies. Important issues like those which affect the status of parties demand a closer scrutiny than those like the loan on a promissory note: “the nature and gravity of an issue necessarily determines the manner of attaining reasonable satisfaction of the truth of the issue”; or as said by Lord Denning, “the degree of probability depends on the subject-matter. In proportion as the offence is grave, so ought the proof to be clear”. But whether the issue is one of cruelty or of a loan on a pronote, the test to apply is whether on a preponderance of probabilities the relevant fact is proved. In civil cases this, normally, is the standard of proof to apply for finding whether the burden of proof is discharged.

25. Proof beyond reasonable doubt is proof by a higher standard which generally governs criminal trials or trials involving inquiry into issues of a quasi-criminal nature. A criminal trial involves the liberty of the subject which may not be taken away on a mere preponderance of probabilities. If the probabilities are so nicely balanced that a reasonable, not a vascillating, mind cannot find where the preponderance lies, a doubt arises regarding the existence of the fact to be proved and the benefit of such reasonable doubt goes to the accused. It is wrong to import such considerations in trials of a purely civil nature.”

The Dastane verdict was also relied on by the Hon’ble Supreme Court in the case of M. Siddiq (D) Thr. Lrs. v Mahant Suresh Das & Ors.[3]which is the case related to the Ayodhya Dispute

506. The court in a civil trial applies a standard of proof governed by a preponderance of probabilities. This standard is also described sometimes as a balance of probability or the preponderance of the evidence. “Phipson on Evidence” formulates the standard succinctly: If therefore, the evidence is such that the court can say "we think it more probable than not”, the burden is discharged, but if the probabilities are equal, it is not. In Miller v Minister of Pensions, Lord Denning, J (as the Master of Rolls then was) defined the doctrine of the balance or preponderance of probabilities in the following terms :

(1)... It need not reach certainty, but it must carry a high degree of probability. Proof beyond reasonable doubt does not mean proof beyond the shadow of doubt. The law would fail to protect the community if it admitted fanciful possibilities to deflect the course of justice. If the evidence is so strong against a man as to leave only a remote possibility in his favour which can be dismissed with the sentence, “of course it is possible, but not in the least probable” the case is proved beyond reasonable doubt, but nothing short of that will suffice. (Emphasis supplied)

The law recognises that within the standard of preponderance of probabilities, there could be different degrees of probability. This was succinctly summarized by Denning, LJ in Bater v Bater, where he formulated the principle thus:

“So also in civil cases, the case must be proved by a preponderance of probability, but there may be degrees of probability within that standard. The degree depends on that subject matter.” (Emphasis supplied)

The definition of the expression “proved” in Section 3 of the Evidence Act is in the following terms:

“Proved” .—A fact is said to be proved when, after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”

Proof of a fact depends upon the probability of its existence. The finding of the court must be based on:

A. The test of a prudent person, who acts under the supposition that a fact exists; and

B. In the context and circumstances of a particular case.

In essence, under the standard of preponderance of probability, the court takes an adaptive and fact-specific approach while evaluating all the evidence offered by both sides and reach a conclusion based on which version of the facts appears to be more reasonable and believable. In other words, a party will typically win a case if the courts, while taking a prudent person’s approach, are convinced that their version of events is more likely, than the other party's version. Where there is burden of proving that something happened and the evidence presented is such, that in the mind of the court the probability that the event/act happened is the same as the probability that the event/act did not happen, then the burden is not discharged and the court will assume that the event/act did not happen.

Preponderance of probability in insider trading cases

The Supreme Court and SAT in their decisions have stated ad nauseum that the standard of proof for proving cases of insider trading is ‘a higher degree of preponderance of probabilities.’ The relevant decisions and their operative paragraphs have been reproduced below in chronological order.

Dilip Pendse v. SEBI[4] (2009) (SAT)

“13. The charge of insider trading is one of the most serious charges in relation to the securities market and having regard to the gravity of this wrong doing, higher must be the preponderance of probabilities in establishing the same. In Mousam Singha Roy v. State of West Bengal MANU/SC/0605/2003 : (2003) 12 SCC 377, the learned judges of the Supreme Court in the context of the administration of criminal justice observed that, "It is also a settled principle of criminal jurisprudence that the more serious the offence, the stricter the degree of proof, since a higher degree of assurance is required to convict the accused." This principle applies to civil cases as well where the charge is to be established not beyond reasonable doubt but on the preponderance of probabilities. The measure of proof in civil or criminal cases is not an absolute standard and within each standard there are degrees of probability.”

Manoj Gaur v. SEBI[5] (2012) (SAT)

“18. It may be noted that the trading has not been done by Mr. Manoj Gaur who is not supposed to trade during the closure of trading window. The trading is done by his wife and brother. No doubt, being deemed to be connected persons to Mr. Manoj Gaur, they were insiders. But no evidence has been brought on record, direct or circumstantial, to show that they were in possession of UPSI about the financial results of the company for the quarter ending September 30, 2008. As we have observed earlier, having regard to the gravity of charge of insider trading, higher degree of preponderance of probabilities is needed to bring home the charge. The adjudicating officer has not brought any material on record to show that they were in possession of UPSI.”

SEBI v. Kishore Ajmera[6]

“22. It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.

26. It has been vehemently argued before us that on a screen based trading the identity of the 2nd party be it the client or the broker is not known to the first party/client or broker. According to us, knowledge of who the 2nd party/client or the broker is, is not relevant at all. While the screen based trading system keeps the identity of the parties anonymous it will be too naive to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned. Prosecution Under Section 24 of the Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt.

Under the SEBI Act, insider trading is punishable with a penalty as well as with imprisonment. Thus since there exists both criminal and civil liability, the Supreme Court in this case clarified that for the penalty to be levied, the act of insider trading is only needed to be proven to the standard of preponderance of probabilities, however, imprisonment can only be directed when it is proven beyond reasonable doubt, owing to the criminal nature of the liability.

Balram Garg v. SEBI (2022) (SC)[7]

40. We are also of the opinion that in the absence of any material available on record to show frequent communication between the parties, there could not have been a presumption of communication of UPSI by the appellant Balram Garg. The trading pattern of the appellants in C.A. No.7590 of 2021 cannot be the circumstantial evidence to prove the communication of UPSI by the appellant Balram Garg to the other appellants in C.A. No.7590 of 2021. It would also be pertinent to note here that Regulation 3 of the PIT Regulations, which deals with communication of UPSI, does not create a deeming fiction in law. Hence, it is only through producing cogent materials (letters, emails, witnesses etc.) that the said communication of UPSI could be proved and not by deeming the communication to have happened owing to the alleged proximity between the parties. In this context, even the showcause notices do not allege any communication between the Appellant Balram Garg and the other appellants in C.A. No.7590 of 2021.


Going through the principle of preponderance that has evolved through the years in cases of insider trading it is clear that the courts have tried to create a standard of proof for cases of insider trading which is not as strict as the ‘beyond reasonable doubt’ standard used in criminal cases but is also at a higher level than the standard ‘preponderance of probability’ standard used generally in civil cases. Further, in the case of Balram Garg the Supreme Court has gone as far as to say that it is only on production of ‘cogent materials’ like letters, emails, witnesses etc. that communication of UPSI can be proven.

However, it is important to note that the factual matrix of the Balram Garg case played a huge part in the outcome of the case. In the Balram Garg case there was no clarity on who had actually communicated UPSI to the parties. It was assumed that communication was made by the MD solely based on the fact that the alleged tippees were family members and living in close proximity to each other. The parties had also brought in evidence of family partition to show that their relationship with the alleged tipper was strained and were not in contact with him anymore. Furthermore, the trading pattern showed that trades had been made outside the UPSI period and certain trades that were made which would not have been made if the appellants were in possession of UPSI.

Therefore, it would not be prudent to apply the observation of the Supreme Court in the Balram Garg in isolation, as communication of UPSI would be a question whose answer will depend of the facts and circumstances of each case and cannot be uniform.

[1] 1947 2 All ER 372 [2] (1975) 2 SCC 326 [3] (Civil Appeals No. 10866-10867) [4] MANU/SB/0159/2009 [5] MANU/SB/0183/2012 [6] (2016) 6 SCC 368 [7] Civil Appeal No. 7054/2021



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